29
Our results suggest that monopolists will invest more heavily in quality assurance than
will duopolists. In addition, being able to capitalize on the full returns (no free riding or
externalities) of investments in quality provides further incentives to employ more stringent
QASs. That is, under the collective reputations scenario, duopolists will reduce their expected
quality. Also, as the ability of consumers to detect the actual quality of the good increases, it is
likely that the stringency of the quality controls will increase. Perhaps not surprisingly, our
numerical simulations show that the size of the market (and hence the potential premiums) has
a positive impact on the level of investments in quality.
In terms of welfare, we can only say that the duopoly with private reputations Pareto
dominates the collective reputation scenario. However, it is less straightforward to compare the
results of the monopoly situation with that of the other scenarios. Processors of course prefer
the monopoly over any of the duopoly situations. Consumers prefer the duopoly with private
reputations over the other two scenarios considered. However, under some conditions (when
the level of quality observability is high, or if consumers value the future highly), consumers
will prefer the monopoly over the duopoly with public reputations. Hence, our model suggests
that it is not clear that market concentration hurts consumers when there is a trade-off between
quantity and quality, and the latter is imperfectly observable. Additionally, if there is no way
that the producer of a given unit of output can be identified among several firms (if it is not
possible to develop private reputations), overall welfare may be increased by promoting the
existence of a monopoly (under the conditions just noted).
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